Trend Trading Strategy: An Overview
Trend trading is a specific trading strategy, predicated on taking positions aligned with the prevailing price direction of a cryptocurrency.
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The essence of this strategy is to initiate long positions when assets are on an upswing and short positions when they're trending downward. Historically speaking, trend trading is considered among the most dependable methods. This reliability stems from the fact that positions are taken based on the natural momentum of the asset, rather than opposing it.
Today, we'll delve into the intricacies of trend trading strategy, highlighting both its advantages and potential pitfalls.
So, what exactly is a trend, and how can one pinpoint it?
A trend refers to a purposeful and pronounced shift in price in a particular direction. An ascending trend continually hits new highs and raises its lows, whereas a descending trend consistently lowers its highs and renews its lows.
One can discern a trend on a chart, and visualize it on platforms like TradingView with tools such as “Segment” or “Horizontal Channel”.
Ascending trend showcased on a BTC graph, highlighting peaks (tradingview.com)
Descending trend illustrated on a BTC graph, spotlighting lows (tradingview.com)
Trend Trading: Core Characteristics
Within every trend, there are two distinct movements: the primary and the corrective. In the primary phase, an asset can either ascend or descend following the trend direction. Meanwhile, during the corrective phase, prices might slightly recover, only to then continue their upward or downward trajectory, depending on the trend's direction.
For a trader utilizing this strategy, the procedure is as follows:
● Pinpoint the trend on the chart, based on its highs or lows.
Await a corrective movement to find a favorable entry point.
Initiate a trade, setting a stop order just past the extremity of the price, while directing the take profit along the trend.
Often, the zenith of a corrective movement coincides with a return to a previous price high/low. This is the prime juncture for trade initiation. This can be visualized on a chart as follows:
Entry during an upward trend
Entry during a downward trend
In any given scenario, the main objective is unequivocal: discern the trend accurately and commence a trade after its correction.
Risks Associated with Trend Trading
The trend trading strategy has its pitfalls and challenges:
● When faced with a tepid trend and a pronounced corrective movement, the viability of the trade's potential (in terms of Risk/Reward ratio) could be compromised. This might lead to the stop order and take-profit points being too proximate on the chart.
● Trends must be assessed independently for each timeframe. A localized uptrend might merely be a correction within a larger, overarching downtrend, and vice versa.
● Awaiting a correction to match the previous movement's high or low isn't a foolproof tactic. There's a risk a trader might activate a stop, after which the price takes the anticipated turn. As a result, trend trading mandates the inclusion of supplementary indicators in technical analysis, like support and resistance levels or trading volumes.
Trading Against the Trend
Counter-trend trading involves making moves right before a correction, acting in opposition to the primary trend. Here, gains are realized once the trend line is attained. Nonetheless, positioning a stop order becomes intricate, marking this strategy as particularly high-risk.
Simultaneously, trading against the trend allows a trader to capitalize on a shift in movement or a structural change. This can eventually offer a rewarding Risk/Reward ratio. Thus, counter-trend trading places significant weight on areas of support and resistance, with a heightened focus on risk containment for every position, ensuring the preservation of a secure trading portfolio.
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